AIC fund manager poll: The American Dream in 2017?

13 December 2016

The AIC has issued the results from its 2016 fund manager poll.

The Association of Investment Companies’ (AIC) annual fund manager survey finds managers more optimistic on the outlook for equities than a year ago, but with weighty concerns. As well as significant geopolitical concerns, for the first time ever global warming cropped up as a major risk for equities.

Some 77% of managers surveyed expect markets to rise in general next year, up from 60% a year ago, but still behind the 91% reported in 2014. Whilst last year managers were hedging their bets, favouring a range of assets (only 52% expected equities to outperform other asset classes), this year a more bullish 76% of managers expect equities to outperform other asset classes in 2017. The AIC received responses from investment company managers primarily from the Global and UK sectors representing £25 billion of assets.

American Dream

After the unexpected Trump win, it seems that the American dream remains alive and well. The US is the country most widely expected to outperform in 2017 amongst 40% of managers. It is also the country most widely expected to outperform on a medium-term (5 year) view (37%). Japan was the second country tipped to outperform in 2017 (20%), with Asia Pacific Ex Japan and the UK in joint third place (10%). On a medium-term, 5 year view, after the US, managers favoured emerging markets (21%) and the UK (11%).

Worries

Whilst a year ago managers were mostly concerned about the weakening of developed markets, a possible recession and lack of ‘value’ in equities, this year’s concerns are somewhat different. Some 18% of manager’s cited a combination of political fears ranging from political breakdown of the EU and European political worries to protectionism/trade wars more generally. Some 14% of managers were primarily concerned by the possibility of rising interest rates. For 9% of managers, the effects of global warming presented the greatest threat for equities, whereas last year no fund managers selected ‘global warming’ as a possible threat to equities. A further 9% thought Brexit negotiations presented the single biggest threat to equities.

Financials most favoured sector for 2017 and beyond

Financials have come from being the third most favoured sector last year to the number one spot for 2017 (26%). Technology remained in second place (21%), followed by commodities and natural resources, which was the third most favoured sector for the second year running (16%).

On a five year view, technology was the most widely favoured sector by 22% of managers followed, in equal measure, by biotechnology/pharmaceuticals, financials and smaller companies (17%).

Reasons to be cheerful

The two most likely causes for optimism amongst fund managers for next year was interest rates remaining low and increase in earnings (both 19%), followed by, in equal measure, strong balance sheets, equities still perceived as good value, better economic growth than expected and Trump potentially reflating the US economy (all 13%).

Where will it end? Views on FTSE 100 for next year

In terms of where the FTSE 100 is most widely expected to close 2017, a quarter (25%) think the FTSE 100 will end the year between 6,500 and 7,000 and a third (33%) think it will end the year between 7,000 – 7,500. A pessimistic 8% of managers think the FTSE 100 will close below 4,000, with another 8% predicting between 6,000 – 6,500. A further 8% predict between 7,500 – 8,000 and a bullish 17% think the FTSE 100 will end over 8,000.

Below 4,000

4000 - 4,500

4,500 - 5,000

5,000 - 5,500

5,500 - 6,000

6,500 - 7,000

7,000 - 7,500

7,500 - 8,000

Above 8,000

8%

-

-

-

-

25%

33%

8%

17%

Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: “It’s interesting to see that after all the uncertainty 2016 brought to bear, fund managers are far more positive than they were a year ago, albeit with weighty concerns. To quote Macmillan, ‘events dear boy events’ have taken over, with pressing geopolitical fears at the top of managers’ agenda. Yet despite this, most managers are cautiously optimistic on the outlook for equities. The breadth of managers’ views demonstrates once again the importance of having a balanced portfolio and taking a long-term view.”

Fund manager comments

Active managers expected to have a “better year” in 2017

Andrew Bell, Chief Executive, Witan Investment Trust said: “The world faces a range of uncertainties, ranging (parochially) from how the Brexit process will be handled to whether the new Trump administration governs more pragmatically than the rhetoric of the campaign trail suggested. We expect both of these factors to be more reassuring than the markets expected in autumn. Less predictable is the outcome of the string of elections across Europe. At worst, they could threaten the future of the Euro and deliver a systemic shock to markets worldwide, but it is also possible that they encourage better economic and political management in the Eurozone, which would be a major fillip for European markets.

“With the main problems being “watched pots” it is possible that equities, particularly in cyclical sectors, could positively surprise in 2017, as the shift in global economic policy towards more proactive fiscal policy could generate more support for economic growth after the recent years of relatively anaemic growth. Nonetheless, with valuations relatively high there are no windfalls from valuations so a selective approach is required. After the surprises this year and the rapid rebound in commodity sector share prices, we expect active managers to have a better year in 2017.”

What if Trump does what he says he’ll do? And outlook for Eurozone

Bruce Stout, Manager, Murray International said: “Donald Trump has campaigned on a commitment to spend more on infrastructure, supported by a higher fiscal deficit, and to champion protectionist policies that will likely curb trade. If he does what he says he will do, this is clearly bad for emerging markets, especially Latin America which sends a bigger proportion of total exports to the US than any other developing region.

“However, these policies will also have domestic consequences – higher inflation and ultimately slower growth are just two – which could force a reappraisal. There is some thought that Trump may tone down his rhetoric now that he’s secured the prize. While that remains to be seen, having control of both Congress and the Senate could prevent the gridlock we’ve seen over the past six years with President Obama.

“Elsewhere, the Eurozone excluding Germany is suffering the brunt of quantitative easing’s so-called unintended consequences: lingering excess capacity, downward pressure on prices, deficient demand and low investment. With Germany relatively immune from such harsh economic realities, the ineffectiveness of European Central Bank policy directives can be tolerated politically, but for the rest of Europe the situation is becoming insufferable. In the UK, the pursuit of a so-called “hard” Brexit, driven primarily by political considerations to appease party members and Brexit voters rather than economic rationale, becomes increasingly difficult to secure under the full glare of parliamentary process. For financial markets this simply means more uncertainty, both political and economic.”

“The upside risk is that animal spirits take hold”

Paul Niven, Manager, Foreign & Colonial Investment Trust said: “Investors seem to be focused on Trump’s promise to cut corporate taxes and boost spending and appear to be assuming a pickup in growth, inflation and interest rates. There is a clear risk that the market is getting ahead of itself in terms of how much Trump will, ultimately, deliver. The outlook for the US economy and market was already improving and fiscal stimulus may be pro-cyclical – with the downside that monetary policy will tighten further if inflation expectations continue to rise.

“Europe looks well placed to perform based on the broader macro environment and earnings are likely to accelerate from a structural trough but political risk is leading to elevated risk premiums. 2017 will present multiple new political risks in the Eurozone. Our base case is that Europe avoids systemic political mishaps in the next year.

“Emerging Markets do face near term challenges but the underlying growth premium from that area will continue to expand. Overall, 2017 looks likely to see bond markets remaining under pressure which will probably mean that global equity ratings are also likely to decline. The good news is that the earnings picture is improving but, at the present time, it appears unlikely that this will meaningfully offset ratings compression. The upside risk is that animal spirits take hold and investors rerate markets on the back of better growth and higher inflation.”

“Good dividend growth from selective UK companies”

James Henderson, Fund Manager of Lowland Investment Company plc, Henderson Opportunities Trust plc and Law Debenture Corporation said: “The fall in Sterling will increase inflation and may lead to a rise in interest rates however, it will help certain UK companies export more overseas. Their competitiveness will be aided and cash generation will be strong. This will result in good dividend growth from selective UK companies.”

Rarely a time when overhang from political uncertainty so significant

Peter Ewins, Fund Manager, F&C Global Smaller Companies said: “There can rarely have been a time when the overhang from political uncertainty has been as significant as it is today for the financial markets. Against this backdrop, we have taken the view that holding a globally spread and sector diverse portfolio continues to make sense. At the margin, we have looked to moderate our exposure to companies with above average financial leverage, given the potential for interest rates to rise. We have also sought to take profits in stocks where valuation metrics look very extended by historic standards. Our focus remains on identifying those smaller market cap companies which have the inherent dynamic within them to deliver premium growth over the medium term. While at present compelling near term value is harder than usual to come by, we are still finding some stocks where we see good upside.”

“Cautious optimism for 2017”

Lucy Macdonald, Manager, The Brunner Investment Trust said: “We think there’s room for cautious optimism for 2017, with some positives and some negatives to consider. Overall, the economy seems to be showing signs of improvement, with some corporate earnings momentum and US tax reform next year likely to provide an additional major boost.

“Our caution would be linked to the current level of valuations, which look more stretched now that bond markets have fallen, plus the fact that we’re going to see modestly higher interest rates, which could hamper economic growth. However, we’re expecting modest to positive returns overall for 2017 and, against that backdrop we think there’s plenty of opportunity to add value through stock selection.”

“A year of political and economic uncertainty”

Simon Gergel, Manager, The Merchants Trust said: “2017 is likely to be a year of political and economic uncertainty which makes it very hard to speculate about how the stock market may behave. It is possible to imagine a stronger stock market, caused by hopes for higher economic and profits growth, as inflation creeps back into the system. However, it is equally possible to make the opposite case, since rising interest rates could choke off economic growth.

“Although the outlook may be difficult to predict, it is still possible to build a portfolio for these circumstances, finding investments that should deliver reasonable returns to investors over the medium term. It is particularly important to pay attention to the fundamental qualities and valuations of companies. We are looking to own strong businesses that are priced at attractive valuations, from which investors can expect to earn a decent return over the medium to long term. An attractive valuation is particularly important, as it can provide downside protection in a difficult stock market environment.”

“Too early to make strategic portfolio adjustments”

Tom Walker, Manager, Martin Currie Global Portfolio Trust said: “Since Trump’s election success, the move in long-term interest rates has been pronounced. The US 10 year Treasury yield has jumped, but only to the same level as a year ago. Investors feel Trump will be pro-growth and possibly inflationary. In my view, it is too early to be making strategic portfolio adjustments on the basis that a post Trump world is going to look very different. The multi-year bull market in bonds is possibly over but low growth and low interest rates are likely to continue. We will address investment decisions on the specific merits of each company we assess.”

UK Smaller Company sector manager views

Robin Boyle, Manager, Athelney Trust said: “Over the medium to long-term. I like the sector in which Athelney specializes, namely smaller companies. But with the UK economy slowing and businesses unwilling to invest, perhaps 2017 is not going to be a stellar year for us. Japan, however, looks to be a decent bet with the much lower exchange rate doing something for exports and its central bank doing everything it can to help the economy grow. Over the long term, I see the price of commodities rising again and would see Russia as being well placed to benefit – in the meantime, the local market looks decidedly undervalued.”

Harry Nimmo, Manager of the Standard Life UK Smaller Companies Trust said: “Markets in 2016 have been driven intensively by top-down investors attempting to second guess the impact on markets of the major political events. In 2017, how political events of 2016 will unfold is equally hard to predict. However, we do not lose sight of the fact that, in the long run, share prices will follow the earnings and dividend prospects of each individual business. That is why our focus on quality, predictability, momentum and growth is appropriate in this uncertain world – a process that has been seasoned by four discreet economic and market cycles. We feel confident, if history is any guide that investors who have long-term investment horizons and understand equity risk, should look forward to the potential for strong returns by holding shares in the Standard Life UK Smaller Companies Trust.”

David Stevenson, Fund Manager, Amati Global Investors said: “Top-down predictions are normally a fraught area for fund managers, and 2017 presents much greater than usual uncertainty. A lot depends on how two scenarios play out. Firstly, the degree to which Trump can successfully engineer reforms and fiscal stimulus in the US. If his policies work, and we remain sceptical, they could offer a tailwind to global markets, although a likely stronger dollar may tighten global economic conditions. Even if this happens, however, it could be blown apart by the second possible scenario of political breakdown in the EU, if the upcoming referenda and elections cause instability. The outcome of these two “known unknowns” will determine the equity outlook for 2017, and well beyond that.”

The survey was conducted with member investment company managers between 14 November and 7 December 2016 on an anonymous basis.

The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed ended investment companies, incorporating investment trusts and other closed ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help Members add value for shareholders over the longer term. The AIC has 342 members and the industry has total assets of approximately £154 billion.

Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.